Weisbrot and Krugman are Wrong: Greece cannot pull off an Argentina

Mark Weisbrot has been arguing, for some time now, that Greece must try to emulate Argentina; that is, to default on its debts not as a bargaining strategy that yields a New Deal within the Eurozone but, rather, in the context of exiting the Eurozone altogether and going it alone. Recently, Paul Krugman has endorsed this position (see here and here). I think they are profoundly wrong.

There are two arguments against the recommendation that Greece and Argentina are similar enough to warrant an Argentinian road for Greece. There are those, like the Cato Institute and IMF diehards, who never forgave Argentina for having successfully escaped the clutches of the poisonous austerity (and internal devaluation) that the IMF had imposed upon the country so as to sacrifice a whole people’s prosperity in the interest of creditors, rentiers and assorted speculators who had flooded the country with dollars (during the era of the currency board). Believe me when I say that I am not one of them. Indeed, I salute the Argentinian people for having toppled a regime, and more than one government, that tried so desperately to sacrifice a proud people on the altar of IMF-led austerity. No, my criticism of the idea that Greece can ‘do’ an Argentina today stems from the view that the circumstances Greece is facing today are genuinely different to those of Argentina a decade ago.

The differences between the two cases, which render the analogy redundant, are three:

1st difference: The potential of exports to act as shock absorbers

Weisbrot and Krugman point out, correctly, that at the height of Argentina’s crisis, its exports (as a percentage of GDP) were not very different to those of Greece. Based on this argument, they dismiss the idea that Argentina managed to recover after its default-devaluation by means of export-led growth.

While it is quite true that Argentina’s export performance in 2001 was by no means better than Greece’s today, it is crucial to note that Argentina’s export potential in 2001 was vastly superior to that of Greece’s in 2012. By export potential I mean the degree of underutilisation of productive resources whose employment can, potentially, produce goods and services for which there is effective demand. In 2001, Argentina’s farms were woefully underproducing primary commodities that were, at that time, seeing their demand skyrocket. In sharp contrast, idle productive resources in Greece cannot produce much for which there is increasing demand.

Take for instance shipping and tourism, mentioned by Paul Krugman as two potential sources of Greek export growth: Both are in speedy decline! Additionally, whereas in the case of Argentina, its next door neighbour (Brazil) was entering a period of rapid growth, Greece’s neighbours are showing no such signs of vitality. Indeed, our traditional trading partners are also buffeted by recession (pushing down the demand for Greek tourism) while non-EU countries (such as Russia) cannot, and will not, make up the difference to any appreciable degree.

Lastly, on this note, Weisbrot and his co-author Juan Antonio Montesino argue that Argentina’s growth was not ‘export’ driven, noting that only 12% of its GDP growth during the 2002-8 period can be accounted for by exports. With all due respect, I fear that such a pronouncement cannot be made lightly. For it is impossible to separate neatly the effects on GDP of exports from the effect of internal aggregate demand when we take into account the fact that internal demand relies entirely on ‘animal spirits’ (i.e. on the optimistic expectations) of investors into goods intended for local consumption. Put simply, the emergence of strong Chinese demand for Argentinian soy, beef etc., in conjunction with the growth of neighbouring Brazil, has had a major impact on the readiness of Argentinian investors to invest in activities that also generated internal demand. In short, that 12% quoted by Weisbrot is simply a gross underestimate.

2nd difference: Greece has no peg with the euro. It has the euro!

Analysts like Krugman, Weisbrot and Rubini make the utterly good point that Greece would benefit enormously from a devaluation of its currency. Of course it would. Argentina does, indeed, provide a brilliant example of how a massive devaluation can help a country escape a debt-deflationary cycle. As, for that matter, does Iceland. However, what they are neglecting is that it is one thing to break a peg linking your currency to some other hard currency (as in the case of Argentina), or to devalue your floating currency (as did Iceland), and quite another to have no currency but to have to create one from scratch.

In the case of Argentina the peso was in existence. All it took to devalue it was to announce that the 1:1 peg with the dollar was over. Suddenly ALL incomes and ALL savings were devalued by the same percentage. Overnight. End of story. It was not pleasant but it could be done. In the case of Greece it simply cannot. And this makes a world of a difference. Why? Because of two important reasons. First, because of the crushing delay in introducing a new currency. Secondly, because of what I call the bifurcation between the stock of savings and the flow of incomes. But let me take these one at a time.

Delay: Bank of Greece colleagues tell me that it will take months before ATMs are stocked with new drachmas once they get the go ahead to print them. Even if it takes weeks, an economy cannot remain un-monetised for so long, especially when already on the canvass of a deep crisis, without major civil unrest and an almost terminal effect on economic activity.

Bifurcation: Even ignoring the crippling effects of the delay, we must not forget that the ongoing crises has led Greek savers to withdraw oodles of their savings from Greek banks and either shift them offshore (London, Geneva, Frankfurt) or stuff them in their mattresses, or hide them in their freezers (in ‘bricks’ of  500 notes).  This means that, by the time we come to an exit from the euro, the stock of savings will be in euros and the flow of incomes and pensions (once the banks re-open) will be in drachmas. So, unlike in Argentina, a Greek euro-exit will drive a wedge between stocks and flows, savings and incomes; with the former revaluing massively relative to the latter. Moreover, the very availability of such large quantities of ‘hard’ currency savings, in the hands of the average Dimitri and Kiki on the street, will ensure that the decline in the value of the new drachma will be precipitous (something that did not happen in Argentina since most savings were in pesos also).

In short, even if we neglect the devastation caused by the delay in the introduction of the new currency (something Argentina did not have to worry about), the new currency will be debased ever so quickly due to this bifurcation, leading to hyperinflation and the loss of most of the competitive gains we might have hoped for from the devaluation.

3rd difference: Greece is perfectly capable of poisoning the water it is swimming in (Europe)

When Argentina defaulted and broke the peg, the ill effects on its trading partners (China, Brazil etc.), as well as on the broader macro-economy in which it was functioning, were negligible. If Greece leaves the euro, however, the results will most certainly prove catastrophic for our ‘economic ecology’, and in a never-ending circle of negative feedback, will bite our struggling nation back.

To begin with, Greece must exit not only the Eurozone but also the European Union. This is non-negotiable and unavoidable. For if the Greek state is effectively to confiscate the few euros a citizen has in her bank account and turn them into drachmas of diminishing value, she will be able to take the Greek government to the European Courts and win outright. Additionally, the Greek state will have to introduce border and capital controls to prevent the export of its citizens euro-savings. Thus, Greece will have to get out of the European Union.

Setting aside the domestic ramifications over loss of agricultural subsidies, structural funds and possibly trade (following the possible introduction of trade barriers between Greece and the EU), the effects on the rest of the Eurozone will also be cataclysmic. Spain, already in a black hole, will see its GDP shrink by more than Greece’s current deflationary record rate, interest rate spreads will tend to 20% in Ireland and in Italy and, before long, Germany will decide to call it a day, bailing itself out (in unison with other surplus countries). This chain of events will cause a bitter recession in the surplus countries clustered around Germany, whose currency will appreciate through the roof, while the rest of Europe will sink into the mire of stagflation.

How good will this environment be for Greece? I submit it to you, dear reader, that the answer is: Not good at all!

In short, whereas Argentina’s and Iceland’s successful default-devaluation strategy did not have adverse effects on the overarching environment in which they had to exist after their bold move, a Greek euro-exit will be the equivalent to poisoning the pool in which we must swim.

Epilogue

Does this mean that Greece ought to grin and bear the massive and misanthropic idiocy of the bailout-austerity package imposed upon it by the troika (EU-ECB-IMF)? Of course not. We should certainly default. But within the Eurozone. (See here for this argument.) And use our readiness to default as a bargaining strategy by which to bring about a New Deal for Europe (in a manner that I have written about here).  

165 thoughts on “Weisbrot and Krugman are Wrong: Greece cannot pull off an Argentina

  1. Why is it socialists (And I use the term “socialist” with the same respect in which they hold my views) believe they can change the reality of a situation if they simply spend enough taxpayer money? A Greek default? Its not an option, it is reality, the Greek government cannot pay its bills, it should default, no amount of taxpayer money is going to change the fact that the Greek government taxes too much, regulates too much and spends too much. To try an alter the perception of reality is expensive and to state the obvious it does not change the fundamentals. To change the fundamentals you have to deal with the fundamentals and the first step in this process is to put the Greek government out of business and free the Greek people from an oppressive political regime that is bleeding them dry and is being propped up by socialist politicians and fascists corporations in Europe.

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  4. Revival on the Head of a Pin: Do U Pari Passu?

    Argentina and its most intransigent creditors are duking it out again (or still) in the Second Circuit, reviving the crazy battle over the meaning and import of the pari passu (equal treatment) clause in sovereign debt contracts. For the small but committed contingent of pari passu pointy heads, this is WorldCupOlympicMarchMadnessSuperBowl. For everyone else, this bears watching because an obscure turn in the Argentina story could open the door to enforcement against sovereign debtors in general. (Nope, this is not a closet Eupdate. Pay no attention to the man behind the blue-striped curtain.)

    Recap: Argentina defaulted on roughly $100 billion in debt in 2001, then restructured about three-quarters of it in 2005 with a 60%++ haircut, depending on how you count. In 2010, it mopped up most of the rest. However, a small subset of expert holdouts keeps on suing, lobbying, and trying to collect by any means necessary. Last December, the long-suffering SDNY Judge Griesa ruled that the Republic breached the pari passu covenant in its debt contracts by (a) paying the holders of its restructured bonds but not the holdouts, and (b) passing a “Lock Law” that bars the government from paying the holdouts. On February 23, the judge issued an injunction, telling Argentina to pay the holdouts pro rata whenever it pays the holders of its restructured bonds. Argentina has appealed, pointing out among other things that paying people who took a massive haircut on par with those who took none was not exactly equal or equitable. This week, the U.S. Government filed a Statement of Interest, joining the New York Fed and the New York Clearing House at a friend-filled party.

    For those who care about neither Argentina nor pari passu, this matters because a broad reading of the February 23 SDNY order would subject countries who pay some creditors, but not others, to injunctions of the sort just slapped on Argentina. Creditors who get paid while the holdouts are not, or even intermediaries routing payments for the debtor, might be exposed as well. Pari passu clauses are ubiquitous in New York and English law sovereign bonds. Since successful sovereign debt exchanges so far have all relied on a credible threat of stiffing non-participants, upholding the order could spell the end of the prevailing restructuring regime.

    A narrow reading of the order would tie the injunctive remedy much more closely to Argentina’s “Lock Law.” The law can be read as a formal subordination of the holdouts (as distinct from selective payment)—a breach of the pari passu covenant under a reasonably conservative reading of the clause. Because this law is unusual, this would at least limit the effect of the order on the foreign sovereign debt market. But even a narrow reading would not solve the problem raised most forcefully in the U.S. Government brief—that the injunction would give creditors a worldwide remedy beyond the scope of the Foreign Sovereign Immunities Act.

    Now some might say that upholding the SDNY order, even broadly, would not be a bad thing: it would jolt a screwed-up legal regime, and might prompt sensible reform. The alternative appears to be effective impunity for sovereigns that, like Argentina, can afford to pay the nuisance tax of never-ending enforcement litigation, and bear what reputational cost it does in the markets. The argument obviously loses force with poor countries that cannot afford to stay out of the markets and live in court for a decade, and must choose between clean water and holdout creditors. Others might say that Argentina’s continuing travails and the revival of pari passu as an enforcement device illustrate the cost to the international system of having no sovereign bankruptcy regime.

    Few would rally behind the status quo as first best, not by a long shot. Even if the SDNY order is overturned as totally wrong (as I think it is), there is something quite dysfunctional about a market where the contracts do not map onto the background legal regime. Normal-looking clauses turn into arrant nonsense when you stick them in sovereign IOUs. This is because private debt contracts are presumptively enforceable (even if not always enforced), and can be restructured in bankruptcy. Substituting immunity for bankruptcy in the sovereign context destabilizes, and occasionally eviscerates, the meaning of the contract text.

    Pari passu is the poster child for this proposition: because sovereigns cannot file for bankruptcy, there is never a moment of agreed insolvency or a waterfall of asset distribution. Instead, creditors owed on Monday might get paid, but those owed on Thursday might not. Is that subordination, or luck of the draw? The one agreed way to breach the covenant is to shout out “I subordinate”—but who does that?? (OK, maybe Argentina … I don’t think the Greek “Retro-CAC” Law is comparable.)

    The biggest mystery, given such apparent dysfunction, is why the brilliant lawyers who draft sovereign debt contracts don’t just fix pari passu once and for all, so that it would make sense. Smart people have offered thoughtful explanations. I suspect the answer has something to do with the dissonance of writing a totally, utterly, certainly unenforceable debt contract. That’s just not what lawyers do—or is it?

    Finally, there is a weird political/PR dynamic at play here. Argentina and Greece, represented by the same law firm and threatened by the same holdout creditors, have apparently conflicting PR strategies. For Argentina, the key is to hitch its case to the European caravan, so everyone thinks that a ruling against Argentina would bring on global financial apocalypse. Hence the reference to Greece, Portugal, Spain, and Ireland as potential victims in the Argentina brief. In contrast, the last thing Greece wants is to have the spectre of Argentina hover over its still-pending debt exchange. The holdouts want some combination of both — they want Greece to feel threatened by the potential outcome in Argentina, but not so threatened that the U.S. and the EU establishment get scared too, and join the battle full force on Argentina’s side.

    All this for pari passu? Stay tuned for geek party of the century.

    Revised to reflect the fact that the New York Fed did not file on appeal this time. It did file in a very similar case involving the same parties in 2004. Argentina refers to this earlier position in its 2012 brief.

    http://www.creditslips.org/creditslips/2012/04/revival-on-the-head-of-a-pin-do-u-pari-passu.html

  5. Let’s say the leaders of Europe have no appetite for solutions suggested like yours? (I haven’t seen any real appetite yet for true solutions)
    So let’s say Greece defaults as your epilogue suggests. Let’s say the Troika walk away from Greece and European leaders still haven’t picked up on your solution.
    Firstly, do you think this outcome could happen?
    If it did happen then what would you suggest next for Greece? and for other countries?

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  8. Yannis, you mentioned that Greece -should the country declare bankruptcy and leave the euro – will poison the water it is swimming in. However, there is another side to this. A handful of devastated and bankrupt countries can support each other politically and economically. Likewise, the international community and the market will fully grasp the fact that the euro – as it was structured – was a recipe for disaster. So the punishment for these countries may not be severe.

  9. re: Lygeros comment by Dean. Even I – with a hen’s IQ – I am aware that our mineral wealth is a powerful negotiating tool and the example of Cyprus as the way forward is all over the FB including mine since the successful bid.All governments up to now were aware…hence they decided to give the country away!!!Otherwise, securitizing the rights for half a century or less they would have bailed the country out.But they would not please Mrs.Merckel…Remember all we have belongs to the ones who countersigned the agreement in case of default so any AOZ step is a step to be taken before we claim anything or we resist even in a theatrical attempt to default.
    re: Tourism and Shipping.Don’t count too much on shipping and tourism.Unfortunately the people aspiring to power now have a rare ignorance -at least about one- of these issues as evident in their published intentions…I hope it is the exception otherwise I prefer to sleep and wake-up half a century later…

    • @Y-patia

      First of all, Greece is not anywhere near self-sufficient in either energy or food. This matters. Secondly, its industrial base is nearly non-existent. Thirdly, even with natural resources (such as oil, gas or minerals), the economic management of these is not so straightforward as to translate into a successful economy with high employment and equitable income distribution. There are many countries rich in natural resources that fail to use them for the benefit of their population. One such is Nigeria — and I suggest to you that in management style, Greece is closer to Nigeria than to Norway.

      My take on this is that Greece needs the EU and the euro. Its economic trajectory otherwise would have been (and would be) dismal — even though membership of the EU has brought many problems to Greece.

    • “First of all, Greece is not anywhere near self-sufficient in either energy or food. This matters. Secondly, its industrial base is nearly non-existent. Thirdly, even with natural resources (such as oil, gas or minerals), the economic management of these is not so straightforward as to translate into a successful economy with high employment and equitable income distribution.”

      Thats complete rubbish!

      1. Greece is completely self-sufficient in its production of electricity! Thats good!
      We just need fuel imports for transportation and heating but not for electricity production!
      If we exploit our own ressources in our EEZ we will be completely self sufficient on energy!

      2. Food: Greece is importing food just because of the negative effects of EU subsidies on our agriculture. This can be reversed within a year or maximum two and Greece could become self sufficient on food and a net exporter of food!

      3. Industrial base is nearly non-existent! WHY IS THIS MR. XENOS? Ask this question first before you jump to conclusion here.
      I will give you the short version of the answer: Greece has been de-industrialized because of the EEC, the EU, the ERM and the Euro! If we reverse the impact of these institutions by leaving the Eurozone the industrialization of Greece will again happen!

      You don’t need to believe me and what I say! Read what Professor Pelagides was saying about these negative effects already in the 90’s!

      http://www.ces.fas.harvard.edu/publications/docs/pdfs/CES_WP46.pdf

      Besides, high interest rates are not only kept artificially high in order to
      attract capital and compensate for low state revenues, but also because of the need to prepare the national currency to formally enter the European Exchange Rate Mechanism (ERM) and keep up with Maastricht obligations regarding the creation of a common European currency (ECU) and so, as is believed, fight inflation. First of all, a high degree of exchange rate fixity requires correspondingly high levels of real interest rates, which further speeds-up the debt accumulation process both directly by increasing the interest payments on debt, and indirectly by reducing the demand for high-powered money and the growth rate of output (Papademos 1993: 153-154). Thus, this policy keeps the deficit at high levels and balloons debt, while at the same time, high interest rates hit the real economy and bring on economic ine11ia as the increase of GDP can not counterbalance high interest rate payments. Moreover, this has the result of an increase in the average rate of state services in order to cover the deficit. and it leads to an increase in prices and inflation. Inflation today remains around 15% and a recent tendency to fall by 2-3 points rapidly overturned by a need to increase taxes (from 22.3% of GDP in 1989 went to 27.2% in 1992) in order to cover an unexpected high deficit in the end of 1992. The fight against inflation does not take place neither by keeping the drachma parity high because a “hard currency” policy weakens trade balance. From -1l.9 as % of GDP deficit in 1988. trade balance grew at 15.8 % in 1992 (OECD 1993a: 71) and thus. deterioration continues. \Vhile the trade deficit is growing. the artificial nominal drachma parity is seriously undermined, while sentiment about the drachma is dominated by the performance and prospects of the current account. Then. real parity falls off due to growing trade deficits, reinforcing market speculation over the national currency and keeping inflation at high levels. despite the fact that economy is in an unprecedented deep recession.

      !!! This policy, combined with excess disabsorption by highly restricting domestic demand, had as an outcome even more catastrophic results on the real/industrial economy. The fall off in domestic demand reduced the size of the domestic market and diminished economies of scale for enterprises, increasi ng the per unit cost -and fUlthermore boosting inflation once more. Enterprises, even those with much potential, find it always more difficult to compete in the international market arena when imports are su bsidized \’ ia the undervaluation of the f?reign currency while, at the same time, expolts are taxed by an “expensive drachma”. As a result, they find only one way to restore competitiveness through the BlustonianHarrisian (1988, 1990) “low road restoration of profits” which is based on low ,,,,age labour force, and restores competitiveness in the short-term, but definitely undermines it in the long-term by lowering investments and preventing technological change (Cohen and Zysman 1987, Pelagidis 1989. 1993). It is estimated that only as a result of further wage cuts alone, there has taken place a sharp increase in Greek profitability of up to some 80% since 1990 (Barkleys 1993: 3), without actually increasing…….

      and this as well:

      Authors who support “hard currency” policy believe that in any other case inflation will boost again, especially the “imported onc’! and then it would not be possible to bring down interest rates. We must mention at this point that:
      a) it is very possible that in the case that we let the currency slide accordi ng to market signals. foreign competitors will keep prices down so as not to lose their domestic market share and. b) by letting the currency find its true equivalence, we make exports more competitive and so increase production. thus compensating for the undervaluation and counterbalancing inflation expectations coming from
      it by enforcing production and improving trade balance.

      !!!!! Moreover. exchange rate parity should follov more closely the currency fluctuations of those countries which especially produce goods competitive to Greece, like Spain, Portugal and Ireland so we can efficiently support national competitiveness. Therefore, although exchange rate policy is a vcry delicate matter and a very sensitive one and thus careful movements need to be made. a selective, differentiated and gradual sliding of the national currency is what this paper proposes for the time being!!!!!!!!!

    • @Aristoteles

      Excuse me, but what I have written is correct. I have not gone into details, but your claims are wrong since Greece is not even self-sufficient in electricity.

      I have been studying and publishing on aspects of the Greek economy since 1987, and I do not need to read the opinions of junior professors such as Pelagides. I shall not comment here on how most Greek academics get their posts, either.

      Anyone who advocates either leaving the euro or the EU is just ignorant of the precise situation of the Greek economy or possibly of economic reality more generally. The cost of euro exit would have been rather less two years ago, and its threat would also have been a strong negotiating position. The useless Pasok administration under Papandreou (the one that Pelagidis has supported) failed Greece; now is too late to exit. Long sentences of jargonistic pseudoscience cannot alter the basic economic facts, however much you would like that to be so.

  10. “Take for instance shipping and tourism, mentioned by Paul Krugman as two potential sources of Greek export growth: Both are in speedy decline!”
    That the Greeks manage to ruin those industries doesn’t mean those sectors don’t have potential. And at least for tourism, there’s more hope for that industry in the environment of an independent currency than inside the Eurozone, ain’t that correct?

    “Greece’s neighbours are showing no such signs of vitality.”
    Turkey, not vital enough for you? Huh?

    “Even if it takes weeks, an economy cannot remain un-monetised for so long”
    In the meantime, the Euro will still be there, until the transition date, of course. The Germans managed to switch from the Reichsmark to the Deutsche Mark in this way, with very positive results. Of course, that won’t be as successful for the Greeks, but it can be done.

    “Even ignoring the crippling effects of the delay, we must not forget that the ongoing crises has led Greek savers to withdraw oodles of their savings from Greek banks and either shift them offshore (London, Geneva, Frankfurt) or stuff them in their mattresses, or hide them in their freezers (in ‘bricks’ of 500 notes).”
    Even more reason to hasten the transition now, before all the wealth has left the country. Plus, once people have to pay for their consumption with a new Drachme, those Euros parked elsewhere will return step by step, and thus improve the current account and the exchange rate. Those offshore savings may prove to be a very important nest egg and not a problem at all.

    “For if the Greek state is effectively to confiscate the few euros a citizen has in her bank account and turn them into drachmas of diminishing value, she will be able to take the Greek government to the European Courts and win outright.”
    Which EU laws prohibit higher taxation of wealth and/or transferring accounts at national banks from one currency to another, based on democratic decisions?

    “Additionally, the Greek state will have to introduce border and capital controls to prevent the export of its citizens euro-savings.”
    Why shouldn’t this be negotiable with the other EU partners, as a temporary measure to ease the transition? You’ll probably find that the others are very willing to give Greece a lot of legal headroom in order to ensure their Eurozone exit.

    “I recognise that in order to have leverage during negotiations, the EU leaders must have the impression that we can do otherwise.”
    Correct. And there’s actually nothing the Greece government (if there was a working one, which isn’t the case now) could do to make the negative experiences of the last years disappear. Face it, there’s no confidence left anymore. And this will have consequences. To be in denial of reality doesn’t help you. The only way left is out of the door of the Eurozone. To say it with a quote from “Blues Brothers”: You don’t have to go home (= leave the EU), but you can’t stay here (in the Eurozone). That’s no big deal. When a relationship doesn’t work, a clean divorce is the best option for everybody involved. All the best, and don’t let the door hit you.

  11. “Take for instance shipping and tourism, mentioned by Paul Krugman as two potential sources of Greek export growth: Both are in speedy decline!”
    That the Greeks manage to ruin those industries doesn’t mean those sectors don’t have potential. And at least for tourism, there’s more hope for that industry in the environment of an independent currency than inside the Eurozone, ain’t that correct?

    “Greece’s neighbours are showing no such signs of vitality.”
    Turkey, not vital enough for you? Huh?

    “Even if it takes weeks, an economy cannot remain un-monetised for so long”
    In the meantime, the Euro will still be there, until the transition date, of course. The Germans managed to switch from the Reichsmark to the Deutsche Mark in this way, with very positive results. Of course, that won’t be as successful for the Greeks, but it can be done.

    “Even ignoring the crippling effects of the delay, we must not forget that the ongoing crises has led Greek savers to withdraw oodles of their savings from Greek banks and either shift them offshore (London, Geneva, Frankfurt) or stuff them in their mattresses, or hide them in their freezers (in ‘bricks’ of 500 notes).”
    Even more reason to hasten the transition now, before all the wealth has left the country. Plus, once people have to pay for their consumption with a new Drachme, those Euros parked elsewhere will return step by step, and thus improve the current account and the exchange rate. Those offshore savings may prove to be a very important nest egg and not a problem at all.

    “For if the Greek state is effectively to confiscate the few euros a citizen has in her bank account and turn them into drachmas of diminishing value, she will be able to take the Greek government to the European Courts and win outright.”
    Which EU laws prohibit higher taxation of wealth and/or transferring accounts at national banks from one currency to another, based on democratic decisions?

    “Additionally, the Greek state will have to introduce border and capital controls to prevent the export of its citizens euro-savings.”
    Why shouldn’t this be negotiable with the other EU partners, as a temporary measure to ease the transition? You’ll probably find that the others are very willing to give Greece a lot of legal headroom in order to ensure their Eurozone exit.

    “I recognise that in order to have leverage during negotiations, the EU leaders must have the impression that we can do otherwise.”
    Correct. And there’s actually nothing the Greece government (if there was a working one, which isn’t the case now) could do to make the negative experiences of the last years disappear. Face it, there’s no confidence left anymore. And this will have consequences. To be in denial of reality doesn’t help you. The only way left is out of the door of the Eurozone.

  12. 1) As far as the export potential is concerned I will touch tourism and shipping like you did. Greek tourism is privileged to be equipped with wonderful islands and seas, an ideal weather, the Greek historical and cultural heritage and a strategic position between three continents. We extend the tourist season, covering the rest of the year and taking advantage of the Mediterranean climate. Alternative forms of tourism include climbing, sports tourism, medical tourism, astronomical and cultural tourism. Greece has more to offer than just “sun and sea” which highlights the intense seasonality of our tourism. The lack of tourism infastructure and skilled manpower is rather obvious. The deficiencies in land, water and air transport infrastructure are well known. We should provide superior quality services and to differentiate them by increasing the supply of services for special interests (e.g. fishing and diving tourism) and to improve the image of the tourist product. Regarding shipping, as a maritime nation, we should consider policies that strengthen the maritime cluster by developing additional services to shipping, as banking, insurance services (e.g. P & I clubs) and intermediaries (e.g. freight forwarders and brokers used boats – cargo & vessel brokerage services).Moreover, the development of port and shipbuilding infrastructure, the expansion of cooperation with port facilities management companies and the attraction of shipping lines (container shipping companies) may contribute to increased revenues from additional services to shipping. Just imagine how many cruise ships we could attract by building some piers and modern marinas. Countries like Germany, USA, Japan and the BRIC (mainly Russia and China) would make great trading partners. Iceland’s exports spiked in 2011 due to the krona depreciation and so will ours. It is ironic that our exports are not at least equal to these of Iceland (as a percent of GDP). And more ironic is the fact that some people do not see the huge export potential of Greece. So we have to invest in the quality of our tourism and shipping industries and let the depreciation take care of the price competitiveness.

    2) The fact that Greece has to change its entire monetary system definitely adds complexities, all of which are manageable. The return to the drachma should be prepared well in advance, publicly informing citizens that their deposits are guaranteed, followed by a short bank holiday and the imposition of capital controls. The capital repatriation (reversing the outflows that took place because of the euro uncertainty) will help contain the dive of the parity along with the increasing demand for our products and services, courtesy of the improvement in competitiveness.

    3) The contagion effect will indeed be catastrophic for the rest of the Eurozone but I believe that caring for the other member nations is more than a luxury for a country with 22% unemployment, 54% youth unemployment, a vast output gap and suicide rates doubled since 2009. We will benefit immensely after regaining our monetary sovereignty and begin following expansionary fiscal and monetary policy. Argentina and Iceland set the example. Arguably, we can do even better.

  13. Dear Yani

    As it is my first comment, I would like to congratulate you for your very active role in the Eurozone crisis debate and particularly for “The Modest Proposal” and your consistent thesis with regards to the dysfunction of the European and global surplus recycling mechanism.

    My point is whether Paul Krugman has attempted to ideologically play with the minds of the “misanthropic” in order to strike the financial discipline structure. If we accept that the “stupidity” of the rescue-slave packages does not just reflect the incompetency of the EU leaders, but it is more an authority game of the established financial discipline structure, then it might be prudent to claim to our beloved EU partners that Greece is not overly dependent on them. On the contrary, what’s more important is that the Eurozone will not survive from a Greek exit.

    There is little doubt that Greece would most likely face these specific serious consequences that you have mentioned but this is something that we might not need to highlight at this critical moment. Besides, the EU leaders have repeatedly stated that the Eurozone will survive a Greek exit with almost insignificant cost; and even if this contention is inaccurate, I assume that it is responsible for the fact that a third of the Greek electorate did favour the coalition that supported the rescue-slave packages.

    I find it hard to believe that one third of the Greek electorate trusted these particular Greek politicians to essentially renegotiate the loan agreements; rather a significant part felt intimidated due to this cunning authority game, especially when a large part of the public lacks sophistication regarding political economy and economic history. Therefore, my impression is that in order to spark a change in the rules within the Eurozone towards an effective surplus recycling mechanism, we have to be more confident about ourselves, spread this confidence to the rest – and possibly defy some future dangers so as to balance this authority game.

    I recognise that in order to have leverage during negotiations, the EU leaders must have the impression that we can do otherwise. But to follow the current flow is to become slaves and be deprived of our identity. Therefore, if we recognise and show to Europeans that the majority of them (if not all of them) has more to lose from a Eurozone break-up than we have to lose from a possible exit (since they threat us that violating the austerity pact means an exit from the Eurozone, thereby employing this authority game), then we might obtain more leverage and take on our side more people from more European countries. This development might coerce Berlin towards the reform of the Eurozone.

    All the best

    • “the Eurozone will not survive from a Greek exit.”
      That’s delusion on a grand scale, the tail believing it can wag the dog. But, hey, let’s simply try that. My bet is on the Eurozone profiting from the exit. Greece has only contributed negative headlines, for way too long. Once it’s out, the other struggling countries will enjoy a much better environment, I’m certain.

    • @ Gray

      Here is another one that thinks we asked for the money.
      Seriously now ,when will you stop believing the propaganda?

      Your money does not go to us for growth.
      You do not help us for growth.
      The money go to your own banksters and your government “helps us” make sure of that.
      We are a laundering operation.
      What is it to like?

      If the help was real we would have thanked you all the way to the next century.
      We do not wish anything bad to the Germans either. On the contrary. And i also have personal reasons to say that.

      Just see the truth and do not accuse arbitrarily.
      Noone is avoiding responsibilities.
      The Greek government made mistakes and now certain people ,with the excuse of helping us the people ,make things worst.

      You lived this in Germany with America and you didn’t like it. Should we?

  14. Germans talk about planning ahead for a GrExit and ringfencing. They claim euro will survive. But what if the GrExit is a success for Greece?
    What about the 500bn stocked away in safe heavens by Greeks as the Germans say ?
    After exiting the euro my guess is those idle savings will return to acquire greek assets (and they will be welcomed too, besides the immoral and selfish position of their owners). Wouldn’t these be enough of a stimulus for the Greek economy? Also what do you think Chinas position would be towards Greece, in case of a GrExit, especially with a leftist government in power ?
    I think Krugman is making our case here because one thing they fear more than a GrExit is a successful GrExit.
    It would be an immense blow towards the EU, effectively signalling “get out now” to the rest of austerity stricken countries.

    • You are absolutely correct. Guess why you do not hear anything about iceland in the mainstream media!

    • “But what if the GrExit is a success for Greece?” Good for them! Hey, Germans don’t wish the Greeks badly. If an Euro exit jumpstarts their economy, we would be happy for them. We really would like to see them accepting responsibility for their own problems, without them constantly asking (or rather, demanding) us for more money. You don’t like our medicine? No problem, invent your own one! Just don’t expect us to pay for that. We’re at the point were we would rather cut our losses instead of being asked to throw more Euros into a bottomless pit. You want money? Print your own one! Period.

  15. BTW, Demetri and other passionate Greeks here in this blog.

    I am not sure if you know who Nikos Lygeros is, but he appears to be the smartest Greek alive today with a registered IQ of 189. Einstein’s was below his, in the high 170’s I think (just to give you a reference point).

    So, here is what the smartest Greek has to say about our present condition (don’t expect him to care too much about elections) and please focus on the overall theme and his big picture:

    http://www.lygeros.org/articles?n=9373&l=gr

    My point is: why do I have to listen to Krugman and Weisbrot when I have a much smarter guy than both of these fellows to listen to?

    • Yes i watch him.
      I also liked watching “Casus belli” and Demetra Aleksaki.

      And i couldn’t agree more.
      All parties are mentioning EEZ anyway.

      Can you know who’s the liar?

    • … Nikos Lygeros … appears to be the smartest Greek alive today with a registered IQ of 189.

      Wow … you don’t say? Apollo be praised, just how many Greeks do you know?

      Einstein’s was below his, in the high 170′s I think (just to give you a reference point).

      The chess Grandmaster Bobby Fischer is alleged to have had an IQ of 187. Outside the world of chess, the guy was a total whackjob (just to give you ANOTHER reference point).

      My point is: why do I have to listen to Krugman and Weisbrot when I have a much smarter guy than both of these fellows to listen to?

      My point is … anyone who tries to sum up a human being’s intelligence (and capabilities) with a single number — well, let’s just say he/she isn’t very intelligent.

    • @ lastgreek

      Agreed.
      Many types of intelligence ,many processes.
      Being smart is the whole character and always walking ,trying to become better.

      First the heart ,then the rest.

  16. @ Yanis

    I think you should allow for a theme based chatroom application on your site.
    What say you?

  17. From a long time American reader but not commentor,
    Thank you Yanis, you gave me what I have really been needing, namely armor, to argue with people why leaving the Euro would be a disaster for Greece and why the austerity plans have to be torn up. That they are-not in conflict, that is a lie spread by the fools in Berlin. But I think you know what the problem is Yanis. People want a reason why things are so bad now and are terrified by the truth, so they cling to “greeks lazy spendthrifts german hardworking frugal” reason. Or it was just greed that caused the crash of 2008!
    This is a European problem and needs a European solution, but in the end the world needs to get together on this. Saying all that, sometimes in history the “weakest” link plays a role bigger than itself. Greece during the war did give hope to the whole world. Those Nazi divisions at the gates of Moscow in those early December days could have used those 6 weeks.
    Keep up the good work and do not run for office!
    PS.
    A roadmap for outreach to German people about this crisis.

  18. Yanis,

    From a stance of profound ignorance, I don’t see your argument as clashing frontally with Krugman’s (I don’t know about Weisbrot’s). I read Krugman’s blog entries as saying, What if Greece winds up leaving the euro? Will Greece vanish as a viable society? No, it won’t. And the case of Argentina offers a certain analog to think about Greece’s certainly unique and historically-specific case. Analogies are always relative. So, Krugman’s premise is precisely what you’re trying to preempt with your argument. One can question Krugman’s judgment for rushing to assume as given an event that should be forestall, rather than encouraged. And that is the real difference.

    Your argument, as I understand it, is that Greece should not leave the euro, because dealing with the consequences would be a very uphill and unnecessary battle for the working people of Greece, who (despite what the mythology fostered by German banks) did not have much of a break even during the boom. You are stressing the avoidable difficulties Greece would face in such scenario. But, again, Krugman is entertaining the case in which an argument like yours fails to inform a drastic change of direction in the political process. In such an eventuality, he admits that Greece would face dire consequences, but that there would also be opportunities to rebuild and reorient the economy.

    The substantive difference stems from the different situations or roles that you and Krugman are playing. Krugman is speaking as a liberal academic and concerned citizen. You are directly engaged in situ in the political struggle, trying to shape things up, and you have a personal history of commitment with the struggles of working people. You think like a fighting agent, not like a more detached (even if sympathetic) commenter looking at things from a more detached perspective. My 2 cents.

    • You may be right about Krugman. But Weisbrot is adamant that Greece should bail out forthwith. And Krugman has lent his support…

    • There is absolutely no benefit for Greece to leave the eurozone now. Two years ago(when the crisis started), maybe . But certainly not now.

      From any aspect you look at it, for Greece to voluntarily(or not for this matter) leave the euro is the dumbest thing ever.

      Conversely, staying in the euro does not mean that Greece has to abide by Merkel’s arbitrary conditions. It simply means that Greece stays put and Merkel begins her remarkable transformation from an ugly caterpillar to an average looking butterfly.

  19. Dear Baumann,it was not a reply to your comment, i made a mistake.
    @No EU dictatorship?
    Το ότι το σχόλιο μου γράφτηκε στα Ελληνικά απαντά στο ερώτημα σου.Παρεμπιπτόντως το
    nickname σου πάει.

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